A REVERSE MORTGAGE (RM) is a type of home equity loan that allows you to borrow against your home while still keeping title to it. It may be an ideal tool if you are a "house-rich, cash-poor" retired person.

Similarly to a "normal" (or forward) mortgage, your home is used as the collateral for the lender, except that in an RM the lender pays you (and adds the payment or draw, plus interest) to your balance.

There are three types of reverse mortgages:

• FHA-insured
• Lender-insured and
• Uninsured

Borrowers can elect to receive a combination of monthly payments, lump sum or a line of equity against which they can draw whenever they need the money.

The benefit of a reverse mortgage is that it allows homeowners (62 and over) to keep living in their homes while using their equity for whatever purpose they choose. Borrowers may need the money to cover health care costs, pay off an existing debt, or support children or grandchildren.

Recently, the government allowed reverse mortgages to be used to purchase second homes (as downpayment).

When the homeowner moves out or passes away, their loan becomes due and their estate must pay it in full (the estate can either refinance to a forward mortgage to keep the home, pay with cash, or sell the home to pay the loan).

To qualify for a reverse mortgage, borrowers must have substantial equity in their home. The eligible amount is generally based on age, the owners' equity in their home, and the prevailing interest rate for the program. Because homeowners keep the title to their home, they are responsible for taxes, repairs, and maintenance. A real benefit of reverse mortgages is that borrowers can live in their homes as long as they like, even after they have completely exhausted their equity. Borrowers must also keep the home insured, and in good repair.

Reverse mortgage payments are non-taxable, nor they affect Social Security payments. However, interest is not tax deductible until borrowers pay off the debt.

Using a reverse mortgage reduces the amount of the borrowers' estate for their heirs (they are using up their net worth)

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